The Monetary Policy Committee (MPC) yesterday followed market expectations and decided to kick off rate normalisation, driven by a solid economic recovery it believes will push growth in gross domestic product this year above the current forecast of 4.3-5.8 per cent.
The Bank of Thailand will reveal the new growth forecast on July 23.
The policy rate was raised yesterday by 25 basis points to 1.50 per cent, the first adjustment since April 2009.
The MPC is of the view that the recovery is solid, with limited impact from the political turmoil. The economy should continue the current recovery pace, and this reduces the need for extra relaxed monetary policies. Rate normalisation should thus be kicked off, said Bank of Thailand assistant governor Paiboon Kittisrikangwan.
The global economy showed continued recovery in the first half and should end the year positively, he said. Affecting the outlook is many countries' moves to cut spending to maintain fiscal disciplines and the European debt crisis. Asian economies are expected to continue improvement, and inflationary pressure is expected to intensify.
"The global economy still shows some signs of risks, but policy makers need to weigh positive and negative factors. We don't expect another global crisis. The overall picture looks stable, though the second half should not be as buoyant as in the first half."
The MPC acknowledged that inflation this year would remain under control thanks to the government's subsidies of cost-of-living programmes, but warned that next year's inflation might exceed the target of 0.5-3 per cent.
Sethaput Suthiwart-Narueput, chief of the Siam Commercial Bank Economic Intelligence Centre, noted that the policy rate, if raised to 2 per cent at the end of this year, could be increased further next year to 3.5 per cent.
He said inflation in 2011 could hit 3 per cent and the higher rate was necessary to ensure a positive interest rate. However, the rate increases would be gradual, to prevent a sharp appreciation of the baht against US dollar.
"Normally, the deposit rate is 50 basis points lower than the policy rate. If inflation hovers near 3 per cent next year, the policy rate then could be raised to 3.5 per cent. A negative interest rate could have an impact on the macroeconomy," he said.
Usara Wilaipitch, a senior economist at Standard Chartered Bank (Thai), expected that the MPC could raise the policy rate at the August 25 and October 20 meetings to 2 per cent. Yesterday's rate increase followed the moves by other central banks.
"The limited political impact allows the MPC and the Bank of Thailand to tackle inflation, which will tend to rise in the future. Core inflation this year could hit 1.7 per cent, from 1.2 per cent now, in the last quarter of this year because of economic recovery. Without the increase, interest rates could be in the negative zone," she said.
Thiti Tantikulanan, head of Kasikornbank's capital markets business division, said the bank would review its interest rates within a day or two.